It's one of the most common arrangements in Australian construction: a builder hires someone, tells them to "get an ABN," and pays them as a contractor. No PAYG, no super, no leave entitlements. Clean and simple.
Except when it isn't.
Because if that worker is really an employee — regardless of what you call them on paper — you could be looking at sham contracting penalties, back-payments for years of unpaid super and leave, and attention from both the ATO and the Fair Work Ombudsman.
This guide covers the actual test the ATO uses, what the courts have said, and the changes coming in 2026 that make getting this wrong even more expensive.
The ABN arrangement that gets builders into trouble
Here's a scenario that plays out on building sites across Australia every week:
Dave is a carpenter. He works exclusively for one builder. He shows up at 7am every day, uses the builder's tools, takes direction from the site supervisor, and gets paid weekly based on the hours he works. He doesn't quote for jobs or have other clients.
But Dave has an ABN. He invoices the builder each week. On paper, he's a "subcontractor."
In reality? Dave is almost certainly an employee. And the builder is almost certainly engaging in sham contracting — whether they realise it or not.
How the ATO actually decides
The ATO doesn't care what you've written on the contract. They look at the substance of the working relationship — what actually happens day-to-day.
The ATO's employee or contractor test looks at several factors:
Ability to subcontract or delegate
Can the worker send someone else to do the job? If the answer is no — they must personally do the work — that's a strong indicator they're an employee.
Most "ABN subbies" on construction sites can't send a replacement. The builder hired them specifically. That points to employment.
Basis of payment
Employees are typically paid based on time worked (hourly, daily, weekly). Contractors are typically paid for a result — a fixed price for a completed task.
If you're paying someone by the hour and they submit weekly timesheets (or clock on and off via an app), that looks like employment regardless of whether the payment goes to an ABN.
Equipment and tools
Does the worker supply their own tools and equipment, or does the business provide them? Contractors typically bring their own. Employees typically use what's provided.
On a construction site, this one gets blurry. A chippy might bring their own hand tools but use the builder's scaffolding, power tools, and site infrastructure. The more the builder provides, the more it looks like employment.
Control over how work is done
Can the worker decide how to do the job, or does the business direct their methods? An employee is told what to do and how to do it. A contractor agrees to deliver a result and decides their own approach.
If a site supervisor is directing someone's work throughout the day — where to be, what to do, how to do it — that worker is being managed like an employee.
Independence
Does the worker operate their own business independently? Do they have their own clients, their own branding, their own insurance? Or do they work exclusively for one builder?
A genuine subbie has their own ABN (not just one they got because a builder told them to), their own insurance, multiple clients, and the ability to accept or reject work.
Risk
Who bears the financial risk if the job goes wrong? Employees are paid regardless. Contractors bear risk — if they quote wrong or the job takes longer than expected, it comes out of their pocket.
What the courts have said
Two High Court decisions from 2022 settled a lot of the grey areas:
Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting (2022)
The High Court ruled that a 22-year-old backpacker working as a labourer was an employee, not a contractor, despite having signed a subcontractor agreement. The court said the terms of the contract (not just the label) determine the relationship. Because the contract gave the company control over how, when, and where the worker performed their duties, he was an employee.
In plain English: calling someone a "subcontractor" on paper doesn't make them one if the contract itself reads like employment.
ZG Operations v Jamsek (2022)
In this case, two truck drivers had operated as partnerships with their own ABNs for over 20 years. The High Court found they were not employees because the contract was genuinely structured as a commercial arrangement — they owned their trucks, could hire employees, and bore commercial risk.
The flip side: genuine contracting is absolutely legal. The question is whether the relationship is actually independent, or whether "contractor" is just a label slapped on what's really employment.
What this means for construction
Both cases tell us the same thing: courts look at the whole picture, with heavy emphasis on:
- What the written contract actually says (not just the title)
- Whether the worker has genuine independence
- Who controls how the work is done
- Who bears the financial risk
Sham contracting: what it costs
Under Section 357 of the Fair Work Act 2009, sham contracting is when an employer disguises an employment relationship as a contractor arrangement. It's illegal.
The penalties
- For companies: Up to $495,000 per contravention (and each worker can be a separate contravention). For serious contraventions: up to $4.95 million.
- For individuals: Up to $99,000 per contravention
- Back-payments: All unpaid entitlements (super, annual leave, personal leave, overtime, penalty rates, redundancy pay) going back to the start of the relationship
- Interest: Calculated on the unpaid amounts from the date they should have been paid
Let's say a builder has 5 workers incorrectly classified as contractors for 3 years. The potential exposure:
- 5 workers x $495,000 = up to $2.475 million in penalties alone
- Plus 3 years of unpaid super (11.5% of wages per worker)
- Plus 3 years of unpaid annual leave (4 weeks per year per worker)
- Plus 3 years of unpaid personal/carer's leave (10 days per year per worker)
- Plus any overtime or penalty rate shortfalls
That can put a small builder out of business.
The "didn't know" defence
The Fair Work Act includes a defence if the employer "did not know" and "was not reckless as to whether" the arrangement was sham contracting. But this defence is getting harder to rely on. Courts expect employers to take reasonable steps to check, and "my accountant told me it was fine" isn't always enough.
Why workers go along with it
If sham contracting is so risky, why does it keep happening?
From the builder's side, the appeal is obvious: no super, no leave, no workers comp, no payroll tax, no unfair dismissal risk. Paying someone on an ABN can be 20-30% cheaper than putting them on the books.
And it's widespread. In March 2026, the ATO and Fair Work Ombudsman issued a joint announcement revealing they received over 7,000 tip-offs about building and construction in 2024-25, with roughly 20% involving allegations of sham contracting. Both agencies confirmed they have active investigations underway.
From the worker's side, it's more complicated:
- Higher take-home pay: Without PAYG tax deducted, the weekly pay looks bigger (even though they'll owe tax later)
- Pressure from the employer: "This is how we do it" or "everyone on site is on an ABN"
- Lack of awareness: Many younger workers don't understand what they're giving up
- Desire for work: In a competitive market, workers take what's offered
What workers actually give up
A worker classified as a contractor instead of an employee misses out on:
| Entitlement | What It's Worth (Approximate Annual Value) |
|---|---|
| Superannuation (11.5% of wages) | $8,050 on $70,000 salary |
| Annual Leave (4 weeks) | $5,385 |
| Personal/Carer's Leave (10 days) | $2,692 |
| Workers Compensation Insurance | Covered by employer's policy |
| Unfair Dismissal Protection | Cannot be dismissed without valid reason |
| Redundancy Pay (after 1 year) | 4-16 weeks' pay depending on service |
| Long Service Leave (after 7+ years) | Varies by state |
On a $70,000 salary, the total value of missed entitlements is roughly $16,000 to $20,000 per year. Over 3 years, that's up to $60,000 that the worker didn't receive — and the employer owes.
Payday Super starts July 2026, and it changes the maths
From 1 July 2026, the government is introducing Payday Super, which requires employers to pay super at the same time as wages — not quarterly.
This matters for the ABN vs employee question because:
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It makes misclassification more visible: Currently, a builder can "forget" to pay contractor super for months before anyone notices. With payday super, the gap between what employees receive and what contractors don't receive becomes immediately obvious.
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Penalties are increasing: The ATO is getting stronger enforcement tools alongside payday super, including the ability to issue directions to pay unpaid super and apply penalties faster.
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Workers will notice: When employees on the same site are getting super every pay cycle and ABN workers aren't, questions will get asked.
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The ATO's focus is sharpening: Payday super is part of a broader crackdown on the "super gap" — the billions of dollars in unpaid super that accumulates each year, much of it in industries like construction.
If you have workers on ABNs who should be on payroll, the window to fix this before payday super starts is narrowing.
A practical checklist: employee or contractor?
Run through this checklist for each worker. The more "Employee" answers you get, the higher the risk of sham contracting.
| Factor | Employee | Contractor |
|---|---|---|
| Can they send someone else to do the job? | No | Yes |
| How are they paid? | Hourly/daily/weekly | Per project or result |
| Who provides the tools? | Mostly the builder | Mostly their own |
| Who controls how the work is done? | The site supervisor | The worker decides |
| Do they work for other clients? | No (or rarely) | Yes, regularly |
| Do they have their own insurance? | No | Yes |
| Do they take financial risk? | No | Yes |
| Did they negotiate the contract terms? | Not really | Yes |
| Can they say no to a job? | Not without consequences | Yes |
| Do they invoice for their work? | Just because they were told to | Part of their normal business |
If you're getting 6 or more answers in the "Employee" column, you should get proper advice before continuing the arrangement.
What to do if you think you've got it wrong
If you look at your workforce and suspect some of your "contractors" might actually be employees, here's what to do:
Don't panic. This is fixable, and the sooner you address it, the better.
Get legal or accounting advice. Talk to an employment lawyer or accountant who specialises in construction. The cost of advice is tiny compared to the cost of getting caught.
Transition affected workers onto payroll. Put them through proper onboarding, set up PAYG, super, and leave entitlements. The ATO and Fair Work both look more favourably on businesses that self-correct.
Consider voluntary disclosure. The ATO's voluntary disclosure process can reduce penalties for unpaid super. Coming forward before an audit is always better than being caught.
Set up proper systems. Use a workforce management platform like SkillsDock that handles both employees (payroll, timesheets, super) and genuine subcontractors (invoicing, compliance) in one place. Having separate, clear workflows for each makes it harder for the lines to blur.
How SkillsDock keeps the two workflows separate
Part of the reason this problem persists is that most construction businesses use different systems for employees and contractors, or worse, manage everything through the same informal process.
SkillsDock keeps the two workflows separate and clear:
- Employees clock on and off via SkillsClock, with hours flowing to payroll review, overtime calculations, and award rate compliance.
- Subcontractors manage their own ABN, insurance, and licences through their profile, track their hours, and generate invoices from verified attendance.
When the systems are separate, the classification stays clear. When everything runs through text messages, paper timesheets, and informal payments, that's when the lines blur.
Where to from here
The rules for this aren't as complicated as they seem once you actually read them. The ATO publishes clear guidance. The High Court rulings from 2022 made the law more straightforward, not less.
What's changed is the consequences. With Payday Super starting in July 2026 and the ATO getting better tools to catch non-compliance, the window for fixing dodgy arrangements is getting smaller.
If you're not sure about any of your workers, talk to an employment lawyer or accountant who works with construction businesses. That conversation costs a few hundred dollars. A Fair Work investigation costs a lot more.
Frequently Asked Questions
Can a worker be a contractor even if they only work for one company?
Technically yes, but working exclusively for one company is a strong indicator of employment. The ATO looks at the whole picture — if the worker has no other clients, uses the company's tools, takes direction from a supervisor, and can't subcontract the work, they're likely an employee regardless of the ABN arrangement.
What's the difference between sham contracting and genuine contracting?
Genuine contracting is legal and common in construction. A genuine contractor operates their own business, has multiple clients, provides their own tools and insurance, quotes for work, and bears financial risk. Sham contracting is when an employer uses a contractor arrangement to avoid paying employee entitlements like super, leave, and workers comp — when the real relationship is employment.
Do I have to pay super for genuine contractors?
Currently, you must pay super for contractors who are paid mainly for their labour (as opposed to a result). From 1 July 2026, Payday Super will require super to be paid alongside wages rather than quarterly, making compliance monitoring easier for workers and the ATO.
What should a worker do if they think they're being sham contracted?
Workers can contact the Fair Work Ombudsman for free advice. They can also use the ATO's employee or contractor decision tool to check their situation. If they've been misclassified, they may be entitled to back-payment of super, leave, and other entitlements going back to the start of the arrangement.
How does Payday Super affect existing contractor arrangements?
From 1 July 2026, employers must pay super at the same frequency as wages — not quarterly. This applies to employees, not genuine independent contractors. But it will make misclassification more visible because employees will see super appearing every pay cycle while incorrectly classified "contractors" on the same site won't. The ATO will have better tools to detect and enforce compliance.
Can I convert a contractor to an employee without penalties?
Yes. Voluntarily transitioning workers from contractor to employee arrangements is looked upon favourably by both the ATO and Fair Work. You should back-pay any missing super through the ATO's super guarantee charge process, and consider voluntary disclosure to potentially reduce penalties. Getting professional advice before making the switch is worth the cost.